Tuesday, December 12, 2017

FTC and FCC Draft a Memorandum of Understanding Regarding Enforcement of Broadband Business Practices

The Federal Trade Commission and Federal Communications Commission have released a draft memorandum of understanding on how they intend to coordinate their investigation and enforcement of any business practices by broadband providers that may raise consumer protection concerns after the FCC adopts its Restoring Internet Freedom proposal.
The 2015 Open Internet Order claimed exclusive FCC jurisdiction over broadband provider business practices as common carrier activities, which effectively stripped the FTC of its authority to protect consumers and promote competition regarding broadband providers. The FCC proposes to restore that authority to the FTC at its December 14, 2017 meeting. My October 19, 2017 Perspectives explained why the FTC is better qualified to handle this enforcement role, based on its existing legal authority, its expertise, and its institutional advantages. 
The agencies issued a statement explaining how they intend to work together to protect consumers:
The FCC will review informal complaints concerning the compliance of Internet service providers (ISPs) with the disclosure obligations set forth in the new transparency rule. Those obligations include publicly providing information concerning an ISP’s practices with respect to blocking, throttling, paid prioritization, and congestion management. Should an ISP fail to make the required disclosures—either in whole or in part—the FCC will take enforcement action.
The FTC will investigate and take enforcement action as appropriate against ISPs concerning the accuracy of those disclosures, as well as other deceptive or unfair acts or practices involving their broadband services.
The FCC and the FTC will broadly share legal and technical expertise, including the secure sharing of informal complaints regarding the subject matter of the Restoring Internet Freedom Order. The two agencies also will collaborate on consumer and industry outreach and education.
In short, the FCC will require that broadband providers disclose any blocking, throttling, paid prioritization or congestion management practices, and failures to make these disclosures will be handled by the FCC’s Enforcement Bureau. The FCC would then defer to FTC enforcement if a broadband provider does not follow what it said in its disclosure, which the FTC would investigate as a consumer protection matter and pursue an enforcement action if it finds a violation. 

Monday, December 11, 2017

Repealing SALT Deduction Should Improve Maryland’s Economy in the Long-Run

The House of Representatives and the Senate passed different versions of the Tax Cuts and Jobs Act. Both versions of the tax reform bill would repeal the state and local tax deduction (SALT) for income and sales taxes. Although this repeal might hurt some Maryland taxpayers in the short-run, it should be a spur to create greater fiscal responsibility in Maryland. If so, this ultimately would benefit Maryland taxpayers and help grow the state’s economy.
“SALT” is the acronym referring to the deduction for individuals who itemize certain tax payments to state and local governments on their federal tax returns. SALT is essentially a wealth transfer from residents in states with relatively low tax rates to residents in states with relatively high tax rates. Additionally, because residents who live in states with relatively high tax rates benefit disproportionately more from the SALT deduction, they have less incentive than they otherwise would to hold their public officials accountable regarding tax and spending policies.
Many Maryland residents benefit from SALT because it allows them to pay less taxes. According to a Tax Foundation study, residents in Maryland receive the 5th highest SALT deduction as a percentage of adjusted gross income, behind residents in New York, New Jersey, Connecticut, and California. But SALT encourages Maryland policymakers at the state and local levels to spend even more than they otherwise would absent the SALT deduction because many residents will not be as adversely impacted.
In this way, over time, the SALT deduction promotes more fiscal prolificacy, less accountability regarding government spending, and diminished economic growth. So while many Maryland residents may think they are better off because of SALT, the longer-term negative effects of SALT may slow economic growth, ultimately making those same residents worse off.
As I stated in a July 2017 blog, Maryland’s fiscal health, ranking 46th in the country in fiscal solvency in one study, remains poor. But the moral hazard of the SALT deduction only tends to exacerbate Maryland’s excessive spending problem. Regarding SALT, Jared Walczak of the Tax Foundation says:
The residents of some localities are willing to accept higher levels of taxation in exchange for greater government service provision; others prefer a smaller government which necessitates lower rates of taxation. Taxpayers may be supportive of increased levels of spending if part of the cost is borne by others; conversely, they may reduce expenditures if they believe that some of the benefit of that spending will be conferred on others. Federal subsidies thus place a thumb on the scale, distorting local decision-making.
Interestingly, the Congressional Budget Office (CBO) published a November 2013 blog titled “Eliminate the Deduction for State and Local Taxes.” The CBO said: “The deduction for state and local taxes is effectively a federal subsidy to state and local governments; that means the federal government essentially pays a share of people’s state and local taxes. Therefore, the deduction indirectly finances spending by those governments at the expense of other uses of federal revenues.” The CBO also stated:
Another argument [against SALT] is that the deduction largely benefits wealthier localities, where many taxpayers itemize, are in the upper income tax brackets, and enjoy more abundant state and local government services. Because the value of an additional dollar of itemized deductions increases with the marginal tax rate (the percentage of an additional dollar of income from labor or capital that is paid in federal taxes), the deductions are worth more to taxpayers in higher income tax brackets than they are to those in lower income brackets. 
If and when SALT is repealed, whether in whole or in part, the positive economic effects will not happen overnight. In fact, an October 2017 report published by The Heritage Foundation states that repealing SALT will only boost economic activity if it is also “accompanied by more efficient state tax-and-spending policies.” As of my January 2016 blog, Maryland had the 7th highest state and local tax burden in the United States.
Governor Larry Hogan has made it his mission to reform Maryland’s burdensome regulatory and tax climates, and he already has succeeded to some extent. A recent CNBC study, America’s Top States for Business 2017, found that Maryland moved up eleven spots from 36th to 25th, since Governor Hogan took office.  However, more support is needed from the Maryland General Assembly for lowering tax rates and cutting spending in order to improve Maryland’s fiscal climate. If the SALT deduction is repealed, Maryland legislators will have a greater incentive to reduce excessive taxes and spending, stimulating economic growth in the long-run.

Wednesday, December 06, 2017

What's at Stake in the Restoring Internet Freedom Order

The date for the FCC’s consideration of the draft Restoring Internet Freedom order is fast approaching. It is fair say that there has not been a more momentous vote since the Wheeler Commission voted to impose the Internet regulations that are now proposed to be undone.

While there are obviously important underlying legal and policy issues, at bottom, what is at stake can be simply stated: Should broadband Internet access service be regulated like a public utility?

Based on my experience in the communications law and policy field going back forty years, I agree completely with former Clinton Administration FCC Chairman Bill Kennard when he said, in 1999, that it would be a mistake to “go to the telephone world” and “pick up this whole morass of regulation” and dump it on broadband. That is essentially what the 2015 Open Internet Order did. And that is what the leading advocates of new Internet regulation asked the FCC to do.

Susan Crawford, one of the leading pro-regulatory advocates, argued explicitly in her book Captive Audience that, for broadband, “America needs to move to a utility model.” No bones about it. Ms. Crawford stated, “like water and electricity,” broadband is a natural monopoly that must be subject to utility regulation.

As I and other Free State Foundation scholars have explained for many years, broadband is not a natural monopoly. Absent a demonstrable market failure and evidence of consumer harm, it should not be regulated like a public utility.

I was very pleased that on December 4, the Free State Foundation published Reactions to the FCC’s Restoring Internet Freedom Draft Order” from ten members of our Board of Academic Advisors. These prominent scholars make a convincing case for changing course – for reversing the 2015 order’s imposition of public utility regulation.

I urge you to read their entire statements. But here I want to highlight a very brief excerpt from each one that is useful in helping to appreciate what’s at stake – and that, hopefully, spurs you to read them all.

BABETTE BOLIEK

The second serious problem created the 2015 Order was the FCC’s creation of the Internet General Conduct Rule. By the FCC’s own edict, the FCC can (i) articulate new, unpermitted business practices, (ii) judge when these previously unarticulated violations of the rule have occurred and (iii) punish violators. The FCC is lawmaker, judge, and executioner – a tri-partite government buried deep in the bowels of the FCC.

TIMOTHY BRENNAN

The previous FCC should never have gone down the 2015 OIO path. Simply, and with modesty, it should have proposed that, because of the general importance of the Internet as a communications medium, it would codify established industry practices regarding delivery of standard quality content, and leave the rest to the market – including paid prioritization to foster innovations requiring higher quality service.

MICHELLE CONNOLLY

The current FCC intends to reverse an order imposed in 2015. I do not see how anyone can argue that the Internet, content, and services on the Internet, and freedom of speech were not flourishing before 2015.

ROBERT CRANDALL

Supporters of the FCC’s decision to repeal Title II (“public utility”) regulation of broadband carriers applaud the decision in large part because they believe that such regulation suppresses capital investment. Recent studies show a substantial slowdown in capital expenditures by broadband carriers since 2014 when the FCC began considering some form of public-utility regulation of broadband.

RICHARD EPSTEIN

All network industries are difficult to organize and regulate. The Wheeler rules underestimated the complexity of the broadband market that the Pai order fully acknowledges, Professor Wu’s overwrought critique notwithstanding.


JUSTIN (GUS) HURWITZ

The new Order, however, is better – factually better, legally better, and better reasoned – than the previous one. It is sufficient on its own terms to survive judicial review – and it is more sufficient than the previous Order to survive review on the terms the D.C. Circuit applied to that Order.

DANIEL LYONS

I also applaud the Commission’s focus on transparency. For competition to work, consumers must make informed choices between providers, which means understanding what each provider offers. Through this order, the FCC can improve the quality of broadband markets by assuring consumers get the information they need to make an informed choice among providers.

JAMES PRIEGER

Those who foresee dire consequences for the future of the American Internet from rolling back the 2015 Title II regulation ignore the great success and continued growth of the Internet over the past two decades – growth that occurred (until 2015) in the absence of net neutrality regulation. I look forward to the lighter-touch regulation of ISPs to, as the draft order states, “advance our critical work to promote broadband deployment in rural America and infrastructure investment throughout the nation, brighten the future of innovation both within networks and at their edge, and move closer to the goal of eliminating the digital divide.”

CHRISTOPHER WALKER

Last week Chairman Ajit Pai announced his intention to roll back the FCC’s 2015 Open Internet Order. I leave it to experts in the telecommunications field to debate the legal and policy merits of the proposed order. As a scholar of administrative law, however, I applaud Chairman Pai’s decision to make public the draft text of the Restoring Internet Freedom Order in advance of the FCC’s consideration at its next public meeting.

CHRISTOPHER YOO

The Federal Communications Commission is poised to adopt the proposed order on Restoring Internet Freedom. The network neutrality debate has always struck me as having a backward-looking quality, calling for preservation of certain features that are claimed to have been critical to the Internet’s past success. As the FCC’s proposed order discusses at length, the record before the agency tells a different story. The existing rules have deterred investment and innovation and worsened the digital divide by making service in rural and low-income areas and service by small ISPs more costly.

So, there is much at stake when the Commission votes on December 14. Here, I’ll let Christopher Yoo have the last word, not only because he fell last in alpha order, but because in this, as in so much else, he is profoundly correct:


“Returning to the light-touch policy that has served the Internet so well represents the best way to foster innovation in a changing environment. If not, the U.S. risks remaining stuck on the innovation-stifling path that has served other countries so poorly.”

Monday, December 04, 2017

FTC Acting Chairman: Put the FTC Cop Back on the Beat

In a November 28, 2017 speech, Acting Chairman Maureen Ohlhausen of the Federal Trade Commission addressed how the FCC’s Restoring Internet Freedom proposal revives and even enhances the FTC’s ability to protect broadband consumers. This proposal, which is on the agenda for the FCC’s December 14, 2017 meeting, would restore the FTC protections broadband customers had before the FCC imposed utility-like regulation of Internet service providers (ISPs) in 2015.

Acting Chairman Ohlhausen described the FTC’s extensive history of enforcing Internet privacy and consumer protections:

We’ve reviewed mergers involving ISPs and online content, such as AOL/TimeWarner, and brought consumer protection cases against companies like Apple, AT&T, Dish, Facebook, Google, T-Mobile, and many others. Indeed, the FTC closely watched the behavior of the early on-ramps to the Internet and brought cases against AOL, Compuserve, Juno, and Prodigy for deceiving consumers about their services. And we have an ongoing case against AT&T Mobility for allegedly unfairly and deceptively throttling broadband speeds on unlimited wireless data plan. Wireless provider TracFone settled with us for similar behavior.

The FTC is also the primary enforcer of online consumer privacy and data security. In fact, I was at the FTC when we brought the first online privacy case against GeoCities in 1998. The FTC has brought more than 500 privacy- and security-related enforcement actions and held more than 20 workshops and events on privacy and data security topics….

Indeed, the FTC has regularly addressed the kinds of anticompetitive behaviors that concern net neutrality advocates. For example, the FTC has sued companies for foreclosing rival content in an exclusionary or predatory manner. We have challenged problematic access, discrimination, pricing, and bundling practices (citations omitted).

She then explained the problem with the approach taken by the FCC in its 2015 Open Internet Order:

Although the 2015 rules purported to be about consumer choice, they likely limited the options available to the consumer. This point is worth emphasizing: in the marketplace, companies seek to deliver what consumers want. But under prescriptive regulation, companies seek to deliver what regulators want. Case-by-case antitrust enforcement focused on competitive harm will allow ISPs, edge providers, and content providers to all experiment with innovative business models that will face the ultimate marketplace test: whether they benefit consumers….

Now some criticize the FTC’s enforcement-based approach. But, as our bipartisan 2007 report concluded, case-by-case enforcement is the best tool for the types of practices that often benefit consumers but might harm consumers in certain instances. This approach allows beneficial practices while curbing abuse. In contrast, per se prohibitions – the inflexible approach taken by the FCC in 2015 – prevent beneficial practices, and, because rules don’t enforce themselves, government would still have to bring specific cases to address any abuses (citations omitted).

Acting Chairman Ohlhausen concluded:


In short, the FTC has tools that are capable of protecting consumers and competition online. We’ve done so across the economy, throughout the Internet, and until 2015, we did so for broadband consumers as well. Yet in the last week, I’ve read a lot of anxious theorizing over the future of the Internet. But the Internet was a success long before the 2015 regulations. And the FCC’s repeal of those regulations doesn’t mean that neutral practices will disappear. Indeed, where consumers desire neutrality, they’ll get it through market competition, facilitated by the FCC’s transparency rules and by antitrust and consumer protection law enforced by the FTC, DOJ, state attorney generals, and private plaintiffs. And companies across the entire Internet ecosystem will remain free to experiment with innovative business models that benefit consumers.

Verizon Plans to Offer Fixed Wireless Residential Broadband

Last week, Verizon announced that it will begin offering fixed wireless residential broadband in a handful of U.S. cities in 2018. Verizon says it will deliver 5G wireless connections to residential subscribers in Sacramento, California as well as a few other cities that will be announced at a later date. As I stated in a November 2017 blog, fixed wireless broadband could help reach more rural consumers throughout the United States, but it also can become a viable competitor to other residential and business broadband technologies located in populated areas.

Friday, December 01, 2017

A Clear Defined Case for Classifying Broadband Internet Access as an Information Service



The question of whether the FCC has authority to impose public utility regulation on broadband Internet access services under Title II ultimately comes down to definitions of terms in the Communications Act. Based on a plain reading of the Communications Act as well as its structure, the FCC's Restoring Internet Freedom draft order presents a convincing, straightforward explanation for why broadband Internet access service is a Title I "information service" and not a Title II "telecommunications service." The draft order's restoration of Title I classification for both fixed and mobile broadband Internet access services is also strongly backed by pre-Title II Order agency precedents that the Supreme Court and lower courts previously upheld. 


If the Restoring Internet Freedom draft order is adopted and subject to appellate review, the order's reading of the statute and resulting conclusion that broadband Internet access services are information services should be upheld in court. And if a reviewing court applies the deferential Chevron standard of review for agency interpretation of federal statutes, the order's legal validity should be a foregone conclusion. Needless to say, if the reviewing court employs the ultra-deferential posture taken in USTelecom v. FCC, the order passes in a cakewalk.


The FCC is set to vote on its Restoring Internet Freedom draft order at its December 14 public meeting.



Thursday, November 30, 2017

ISPs to SEC and FCC: Broadband Investment Has Declined

As the FCC has done for all proceedings since Chairman Ajit Pai took over in January 2017, the FCC released the Fact Sheet and Draft Order in the Restoring Internet Freedom proceeding three weeks in advance of its December 14 vote. In response to the release, Commissioner Mignon Clyburn published her own Fact Sheet and Glossary about the harms she believes the Order will create.
Here is her definition for “cost-benefit analysis:”
Cost-benefit analysis – Despite insufficient data and data to the contrary, the Chairman's Order draws conclusions by only accepting self-serving statements made by large broadband providers. It makes no effort to verify these claims against the statements these very same companies have made in filings before the Securities and Exchange Commission (SEC).
However, in the Draft Order, the FCC concluded that broadband investment declined by 5.6% since the adoption of the Title II Order. This figure, compiled by Hal Singer, uses data that comes directly from broadband ISP’s 10-Q and 10-K forms, which are required by the SEC. Even my blog estimating a $5.6 billion decline in broadband investment since the Title II Order, which also was cited in the Draft Order, uses data collected directly from these filings required by the SEC. Broadband ISPs are reporting figures to the SEC that are consistent with what they also are telling the FCC; broadband investment has declined since the Title II Order was adopted.
For a more accurate assessment of the FCC’s proposal to conduct a cost-benefit analysis, see this July 2017 Perspectives from FSF Scholars by FSF Senior Fellow Ted Bolema. 

Wednesday, November 29, 2017

AT&T/Time Warner Merger: Parties Are Far Apart in Requests for Trial Date

The Department of Justice and the merging parties, AT&T and Time Warner, are proposing different dates for their upcoming trial that are far apart. AT&T and Time Warner proposes that the trial begin on February 20, 2018, while DOJ is seeking to delay the trial until May 7, 2018. The difference is important because the merger agreement is scheduled to expire on April 22, 2018. The merger was first announced in October of 2016, so DOJ has already had more than a year to review the merger and prepare for trial. 
Free State Foundation President Randolph May and I provided an analysis of DOJ’s challenge to the merger in a recent column in The Hill.